Developer Leigh Chiavaroli, right, leaves the royal commission with his father, Peter, on Tuesday. Photograph: David Crosling/AAP

A union boss threatened to bury a concreter's head next to Ned Kelly unless he was kicked off a building site at a former Victorian prison, a royal commission has heard.

Developer Leigh Chiavaroli said CFMEU state secretary John Setka wanted concreter Paul Costa off the site because he was the brother-in-law of prominent Victorian developer Daniel Grollo.

Chiavaroli told the royal commission into trade union governance and corruption that Setka had also said he hated Costa, after they had a fight a decade earlier.

"I hate the cunt, I'm going to come down there, rip his head off, shit down his throat and bury his head next to Ned Kelly's," Chiavaroli alleged Setka told him during a phone call.

The bones of the bushranger were found in 2011 in a mass grave at Pentridge prison, the site of the development.

Chiavaroli said the CFMEU came onto the building site after a worker died in October 2009.

He said Setka demanded the developers employ his best friend, Anton Sucic, and later his brother-in-law, Ivan Dadic, as safety officers, otherwise the union would shut the site down.

Chiavaroli said both men were regularly not on the site and that Dadic's time sheets regularly mis-stated his actual hours.

"I was constantly badgered by our accounting people and other directors as to why we were paying him a full salary and I explained to them we had no option, we had to do it," Chiavaroli told the commission sitting in Melbourne on Tuesday.

Chiavaroli's father, Peter Chiavaroli, gave evidence that he was told he could pay Melbourne identity Mick Gatto $50,000 each time he wanted to fix a problem with the union. Gatto is described as a "professional mediator" in the Melbourne building industry.

A union statement said the CFMEU got involved at the Pentridge site because it had a bad safety record, culminating in the worker's death in 2009.

Builder Andrew Zaf said he built a roof for Setka free to avoid workplace problems.

"Things went on a lot better for a while, and you could notice the difference," Zaf said.

He also said it was "mayhem" on a building site when deliveries didn't arrive and work stopped.

The commission's Melbourne hearing will resume on Wednesday.

• This piece was amended on 9 July 2014. The original wrongly said John Setka was a former secretary of the CFMEU.